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Short selling, informational efficiency, and extreme stock price adjustment

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  • Fan, Yi
  • Gao, Yang

Abstract

Using Chinese equity data from April 2009 to August 2020, we contribute to the literature by exploring the impact of short selling on stock prices in three aspects. First, we find that as short sellers become more active, stock price adjustments accelerate, and prices respond more swiftly to public information. Second, we investigate the trading behavior of short sellers during periods of extreme stock price fluctuations and reversals. Our empirical findings suggest that short sellers behave like contrarian traders during these periods and consequently, short sales reduce the stock price crash risk. Last, we find that in emerging markets dominated by individual investors, sentiment seems a key factor for short sellers to moderate market crashes. When the market experiences unexpected sudden plunges, short sellers become “support buyers” and reverse the previously bullish investor-dominated market sentiment, thus correcting mispricing and mitigating irrationality.

Suggested Citation

  • Fan, Yi & Gao, Yang, 2024. "Short selling, informational efficiency, and extreme stock price adjustment," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1009-1028.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:1009-1028
    DOI: 10.1016/j.iref.2023.08.013
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    More about this item

    Keywords

    Extreme price; Information efficiency; Investor sentiment; Price adjustment; Short selling;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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